The Chennai Bench of the Income-tax Appellate Tribunal held that under a provision of India’s tax law, “influence” implies dominant influence when “a person who purchased more than 1/5th of the total sales of the taxpayer would have a distinctly dominant influence on the pricing and can exercise a de facto control.” The tribunal, thus, concluded that sales to two customers constituting more than 20% of the taxpayer’s total sales constituted “dominant influence.” The related-party relationship was upheld
The case is: Hospira Healthcare India Private Limited v. DCIT
The taxpayer (incorporated as a subsidiary of a Singapore company) engaged in manufacturing and selling of generic injectable drugs to its group entities and certain other concerns. The taxpayer acquired the generic injectable pharmaceuticals business as a going-concern on slump-sale basis. The agreements entered into by the pharmaceuticals business and distribution entities were inherited by the taxpayer as “legacy agreements.” The business model of the taxpayer’s relationship with is distribution partners was on a profit sharing basis.
The Transfer Pricing Officer proposed adjustment because of or relating to the following:
The conclusions of the Transfer Pricing Officer were upheld by the dispute resolution panel. The taxpayer appealed before the tribunal.The tribunal held that:
The tribunal, thus, set aside the orders of the tax authorities in relation to the determination of profit share and remanded the case back to the Assessing Officer / Transfer Pricing Officer for consideration.
Read a March 2017 report [PDF 350 KB] prepared by the KPMG member firm in India: Sales to two customers which constitutes more than 20 per cent of total sales of the taxpayer shall constitute 'dominant influence'; AE relationship upheld
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